Facebook's Hidden Business Opportunity: Payments

Facebook’s advertising business is getting a lot of bad attention ahead of its expected IPO this week: General Motors just canceled a $10 million ad campaign, and other advertisers are complaining that Facebook ads don’t work that well.

However, there’s another part of Facebook’s business that may have more upside: Payments.

Here’s a breakdown.

  • In 2011, 15 million Facebook users bought something with Payments. That’s only 1.8% of Facebook’s 845 million monthly active users (MAUs), as reported at the end of 2011.
  • Facebook earned $557 million from Payments in 2011. That’s an average of $37 per purchaser.

Right now, as per its latest S-1 revision, Facebook has 901 million MAUs.

Let’s keep it simple for now and assume no user growth and constant revenue-per-user. Then if Facebook can get 10% of its users to use Payments in 2013, that’s $3.3 billion in revenue.

(In fact, users will continue to grow, but revenue per user will probably fall as more types of commerce opportunities are added — gamers, who are the main users of Facebook Credits right now, tend to be “whales,” that is, a few people buy a LOT of goods, raising the average.)

But let’s take that ballpark figure of $3.3 billion in Payments revenue.

By way of contrast, Facebook had sales of $847 million in advertising last quarter, and will probably have sales between $4 billion and $6 billion in advertising for the year.

That would make Payments somewhere between 35% and 45% of Facebook’s total revenue.

That seems reasonable. Payments as a percentage of overall revenue has been growing every quarter:

Facebook revenue mix (updated for Q1 12)

Photo: Facebook filings

And even though absolute Payments revenue dropped last quarter, it dropped a lot less than ad revenue:

Facebook revenue makeup (updated for Q1 12)

Photo: Facebook filings

So how does Facebook increase the number of people buying things with its payment systems?

There are several possible ways, all challenging but not impossible:

  • Easiest: mobile users. Facebook already allows in-game purchases on mobile versions of Facebook apps. But in February, it added the ability for users to buy HTML-based Facebook apps (not native apps), using carrier billing. Over time, Facebook can expand the types of purchases users can make on their mobile phones.
  • Harder: expanding Facebook Credits to other types of purchases beyond games. This could be particularly compelling for purchases that require coordination between friends, like event tickets (Facebook has already demonstrated how this could work through a partnership with Ticketmaster), travel reservations, and gifts. However, Facebook wouldn’t be able to take anything close to a 30% cut of these non-virtual goods, which could dramatically lower the average revenue per purchaser.
  • Very hard: expanding Facebook Credits beyond Facebook. This would involve extending the Facebook Open Graph platform to include a “buy” function in addition to the “like” and other functions. However, as we pointed out in our special report on Facebook’s Business Opportunity, online payments has high barriers to entry, particularly creating a robust fraud-detection system. Having PayPal founder Peter Thiel on Facebook’s board of directors could help Facebook tackle this problem — or make the company very aware of how hard it will be to try.

In conclusion, Facebook’s advertising business is relatively mature compared with its Payments business, where Facebook only started turning the crank last summer. So a slowdown in advertising revenue may not be quite as disastrous as it seems.

 

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